Investors count losses as IPO market booms

Share market investors at the Australian Stock Exchange. Sharemarket.

Investors that have sunk tens of billions of dollars into new listings over the past 18 months are sitting on lacklustre returns, with a third of new floats currently trading below their offer price, while others have barely moved from their offer price.

In total, more than 40 per cent of new shares to hit the Australian stock market are either sitting on paper losses or have returned less than 5 per cent from their offer price.

The figures come as a warning to investors with the latest round of initial public offerings to kick off with nearly two dozen share market listings expected over the next two months.

“A lot of the IPOs are being fully priced and many are coming out of private equity hands, so the valuations are steep,” said Donald Williams, chief investment officer at Platypus Asset Management.

“The Australian market itself is not in good shape, with growth in a declining state compared to

other markets.”

Since December 2013, companies have raised more than $23 billion through 115 initial public

offerings on the Australian Securities Exchange, according to Bloomberg data.

Helped by the massive $5.6 billion Medibank offer, a record $17.5 billion was raised through IPOs in 2014 itself, making it the best ever year for fund raising.

After the global financial crisis, IPO activity in Australia picked up momentum in late 2013 as

sustained domestic economic growth, low interest rates and a fast-growing superannuation savings pool drove investments into equity markets.

Despite these factors, Australia’s stock market has performed poorly over the last 18 months. The S & P/ASX 200 index rose just 1.1 per cent in 2014 and has remained quite volatile in the current year as concerns have grown about economic growth and the direction of RBA’s monetary policy.

After climbing sharply in the first few months of 2015, the benchmark index repeatedly failed to breach the 6000-points barrier, and has since stumbled back to below 5500 points.

That performance has reflected in the share prices of recently-listed stocks, and the disappointment for investors has been more acute in case of the larger public floats, which typically garner more attention and demand.

Among companies that raised more than $100m through an IPO since December 2103, nearly one in of every four is currently trading in the red. Another 10 per cent have risen less than 5 per cent.

The list is headed by Medibank, which listed through the biggest public float during this period.

Shares in the health insurer hit a high of $2.59 in February, but have been in retreat for the past

three months over sinking prospects for its short term outlook. The stock currently trades just above the $2 price that retail investors paid, but institutional investors who paid $2.15 a share in the float are already underwater.

Accounting software major MYOB, which last month climbed into the ASX ranks in the largest IPO this year, already trades below its issue price of $3.65 a share. Other high profile listings such as Nine Entertainment, Monash IVF and Vocation, count among the major disappointments for investors.

Some bets, however, have paid off handsomely for investors. Shares in intellectual property services firm IPH and hotel group Mantra have more than doubled in value since listing.

Media monitoring company iSentia, auto parts business Bursons, credit information firm Veda and jewellery retailer Lovisa are other leading gainers, each stock having climbed between 60 to 80 per cent from its offer price.

Falling returns among the larger listed companies and a dearth of quality stocks are the major

reasons investors flock to the IPO market, fund managers say.

Australian companies are forecast to deliver earnings per share growth of just 4 per cent for fiscal

year 2016.

By comparison, companies raising capital are typically in a high-growth phase, with

earnings growth of 10 to 15 per cent on average.

“It is a difficult market to make money. Most businesses that get floated show strong EPS growth and that is what draws fund managers,” said Mr Williams, whose fund has acquired shares in several IPOs over the last 18 months.

With private equity firms looking to cash out their holdings and investors still showing a lot of

appetite for equities, the IPO market would definitely remain strong for this year, he said.